By Anne Sherry, J.D.
A Ninth Circuit panel narrowly revived some claims alleging that Nvidia Corp. and three of its officers defrauded investors by downplaying the extent to which Nvidia’s gaming revenues relied on the demand for cryptocurrency. The district court had held that the plaintiffs failed to prove scienter, but the appeals court held that one of the individual defendants both made materially false and misleading statements and did so with scienter. Dissenting, one of the judges wrote that the plaintiffs failed to allege either falsity or scienter under the requirements of the PSLRA (E. Öhman J:or Fonder AB v. NVIDIA Corporation, August 25, 2023, Fletcher, W.).
Lawsuit. Nvidia has both a gaming platform and a smaller original equipment manufacturer (OEM) unit comprising chips designed for tablets and phones. When cryptocurrency began to take off, the company saw increased demand for a processing unit that, while intended for gaming (and attached to the Gaming segment), could also be used to mine crypto. In response, Nvidia launched a special unit designed for cryptocurrency and attached these sales to the OEM segment. Despite the new crypto-mining unit, crypto miners continued to buy enormous quantities of the gaming-designed unit. Several institutional investors sued, alleging that the defendants, by reporting the cryptocurrency mining sales in OEM rather than in its Gaming segment, were able to claim that a downturn in mining-related revenues would not negatively affect the Gaming business.
District court reversed in part. The district court for the Northern District of California dismissed the investors’ first amended complaint without leave to further amend, holding that the complaint failed to connect any particularized facts about the company’s cryptocurrency revenues to the allegedly false statements. However, a majority of the appeals court panel determined that the court erred as to one of the defendants, against whom the complaint pleaded both false or misleading statements and scienter. The Ninth Circuit accordingly affirmed in part, reversed in part, and remanded the case back to the Northern District of California.
Dissent. Judge Sanchez dissented from the Ninth Circuit opinion on the basis that the complaint did not meet the exacting pleading requirements of the PSLRA. The complaint’s central falsity allegation—that executives underreported cryptocurrency-related sales by $1.126 billion—was based entirely on a post-hoc analysis by an outside expert (Prysm) that relied on generic market research and questionable assumptions. “We have never allowed an outside expert to serve as the primary source of falsity allegations where the expert has no personal knowledge of the facts on which their opinion is based, for example by corroborating their conclusions with specific internal information or witness statements,” Judge Sanchez wrote.
Furthermore, the plaintiffs’ allegations did not raise a strong inference of scienter. The complaint did not put forward any internal report or data source that would have put executives on notice that their statements were false or misleading when made, nor did it cite any internal source corroborating Prysm’s revenue estimates. On the contrary, the only specific allegation of an internal study supported the defendants’ statements that most of the cryptocurrency demand was serviced by a new product designed for crypto miners.
Appellate majority decision. Despite the dissent’s—and the defendants’—objections about Prysm’s revenue analysis, the two majority judges deemed the analysis to be sufficiently reliable when combined with other allegations in the complaint. The analysis was prepared by knowledgeable and competent professionals with PhDs in business economics from Harvard and professional experience in the economics of blockchain. Prysm provided a detailed analysis to support its conclusions, and the results were similar to those obtained in an independent investigation by RBC Capital Markets. The complaint also alleged that former Nvidia employees confirmed that crypto miners bought enormous quantities of the gaming-designed mining unit and that these revenues were counted towards Gaming rather than OEM revenues.
Finally, “the essential correctness of Prysm’s analysis is confirmed by events in the market,” the majority wrote. When crypto mining became too expensive and crypto miners stopped buying the gaming-designed mining unit, Nvidia reduced its year-over-year revenue estimate by 7 percent. In combination, these allegations were enough to show a sufficient likelihood that a very substantial part of Nvidia’s revenues came from sales of the gaming unit for crypto mining.
The amended complaint sufficiently alleged that two of the defendants made materially false or misleading statements when they told analysts and investors that all or nearly all of Nvidia’s crypto-related revenues were reported in its OEM segment. Furthermore, one of these defendants—CEO Jensen Huang—did so knowingly or recklessly, satisfying the PSLRA scienter element. Confidential witness statements showed that Huang knew about the large volume of sales of the gaming unit to crypto miners, and Huang himself publicly stated that he carefully monitored Nvidia’s sales data. Even if no single allegation was enough by itself, a holistic review of all the allegations gave rise to a strong inference of scienter in this case.
The case is No. 18-cv-07669.